Lockheed Martin 2015 Annual Report Download - page 67

Actuarial Assumptions
The plan assets and benefit obligations are measured at the end of each year or more frequently, upon the occurrence of
certain events such as a significant plan amendment, settlement or curtailment. The amounts we record are measured using
actuarial valuations, which are dependent upon key assumptions such as discount rates, employee turnover, participant
longevity, the expected long-term rate of return on plan assets and the health care cost trend rates for our retiree medical
plans. The assumptions we make affect both the calculation of the benefit obligations as of the measurement date and the
calculation of net periodic benefit cost in subsequent periods. When reassessing these assumptions we consider past and
current market conditions and make judgments about future market trends. We also consider factors such as the timing and
amounts of expected contributions to the plans and benefit payments to plan participants.
We utilized a discount rate of 4.375% when calculating our benefit obligations related to our defined benefit pension
plans at December 31, 2015, compared to 4.00% at December 31, 2014 and 4.75% at December 31, 2013. We utilized a
discount rate of 4.25% when calculating our benefit obligations related to our retiree medical plans at December 31, 2015,
compared to 3.75% at December 31, 2014 and 4.50% at December 31, 2013. We evaluate several data points in order to
arrive at an appropriate discount rate, including results from cash flow models, quoted rates from long-term bond indices and
changes in long-term bond rates over the past year. As part of our evaluation, we calculate the approximate average yields on
corporate bonds rated AA or better selected to match our projected postretirement benefit plan cash flows.
We utilized an expected long-term rate of return on plan assets of 8.00% at December 31, 2015, consistent with the rate
used at December 31, 2014 and December 31, 2013. The long-term rate of return assumption represents the expected long-
term rate of return on the funds invested or to be invested, to provide for the benefits included in the benefit obligations. This
assumption is based on several factors including historical market index returns, the anticipated long-term allocation of plan
assets, the historical return data for the trust funds, plan expenses and the potential to outperform market index returns. The
difference between the long-term rate of return on plan assets assumption we select and the actual return on plan assets in any
given year affects both the funded status of our benefit plans and the calculation of FAS pension expense in subsequent
periods. Although the actual return in any specific year likely will differ from the assumption, the average expected return
over a long-term future horizon should be approximately equal to the assumption. As a result, changes in this assumption are
less frequent than changes in the discount rate.
Our stockholders’ equity has been reduced cumulatively by $11.3 billion from the annual year-end measurements of the
funded status of postretirement benefit plans. The cumulative non-cash, after-tax reduction primarily represents net actuarial
losses resulting from declines in discount rates from 6.375% at the end of 2007 to 4.375% at the end of 2015 and investment
losses incurred during 2008 and 2015, which will be amortized to expense over the average future service period of
employees expected to receive benefits under the plans of approximately 10 years as of December 31, 2015. During 2015,
$850 million of these amounts was recognized as a component of postretirement benefit plans expense and about
$693 million is expected to be recognized as expense in 2016.
The discount rate and long-term rate of return on plan assets assumptions we select at the end of each year are based on
our best estimates and judgment. A change of plus or minus 25 basis points in the 4.375% discount rate assumption at
December 31, 2015, with all other assumptions held constant, would have decreased or increased the amount of the qualified
pension benefit obligation we recorded at the end of 2015 by approximately $1.5 billion, which would result in an after-tax
increase or decrease in stockholders’ equity at the end of the year of approximately $1.0 billion. If the 4.375% discount rate
at December 31, 2015 that was used to compute the expected 2016 FAS pension expense for our qualified defined benefit
pension plans had been 25 basis points higher or lower, with all other assumptions held constant, the amount of FAS pension
expense projected for 2016 would be lower or higher by approximately $120 million. If the 8.00% expected long-term rate of
return on plan assets assumption at December 31, 2015 that was used to compute the expected 2016 FAS pension expense for
our qualified defined benefit pension plans had been 25 basis points higher or lower, with all other assumptions held
constant, the amount of FAS pension expense projected for 2016 would be lower or higher by approximately $85 million.
Funding Considerations
We made contributions related to our qualified defined benefit pension plans of $2.0 billion in 2014 and $2.25 billion in
2013 inclusive of amounts in excess of our required contributions. We made $5 million in contributions to our new Sikorsky
bargained qualified defined benefit pension plan in 2015. Funding of our qualified defined benefit pension plans is
determined in a manner consistent with CAS and in accordance with the Employee Retirement Income Security Act of 1974
(ERISA), as amended by the Pension Protection Act of 2006 (PPA). Our goal has been to fund the pension plans to a level of
at least 80%, as determined under the PPA. This ERISA funded status is calculated on a different basis than under GAAP. In
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